Assumptions:
- We are in the bottom of the market (12/2008)
- The market/economy will recover in second half of 2009 or 1st half 2010
- Credit will remain tight through 2009
- Mergers & Acquisitions will be driven by companies with cash and those Companies will use that cash to buy cheap companies in their industry.
- Premiums of at least 30% will have to be paid for the purchase of companies.
Observations:
See this link for the supporting spreadsheet. This spreadsheet identifies two groups. The first group is identified as "BUY". These are companies that have at least $1 Billion in Cash and a market cap of less than $15 Billion. The second group is identified as "BUYER". These are companies that have Cash in excess of $10 Billion.
Since the assumption is that companies will have to finance their own acquisitions, which can be done through either cash and/or issuance of stock, there are just 14 BUYERS in this group. Of these 14, there are only 5 that have 30% or less debt (XOM, CSCO, MSFT, INTC, GOOG). These 5 will really be in the driver seat over the next year as stock prices may continue to go down and they can grow their business through acquisition at a very cheap price.
However, just because a company has debt in excess of 30% doesn't necessarily mean that they are disqualified from making acquisitions. It does mean that they will have a very difficult time of issuing more debt to make those acquisitions and if they burn too much cash in the acquisition their credit rating may go down. An example of this is HPQ that has debt to cash ratio of 174%.
The "BUY" companies have some very interesting elements to them. The assumption is that a 30% premium will have to be paid to purchase a company, but when that company has a large amount of cash, that cash can be used to offset the premium. There are several cases where even if a 30% premium is paid, the actual price paid is less than the current stock price without a premium because of the cash that the "BUY" company has. There are 10 companies like this: CF, SLT, KG, IACI, ERTS, NOVL, SAY, MXIM, ATE, TLAB.
A specific example of this is CF (CF Industrial Holdings) which has 36.36% of it's market cap in cash and a stock price of $55.50. It also has a return on Equity of 46.236% and a PE of only 4.01. If it were to be acquired for a premium of $72.15, the cash in the company would actually make the purchase price $51.97 or $3.53 LESS THAN then current market price. What a deal!
The only problem is that there is no identified buyer with enough cash in that industry (Agricultural Chemicals) that could buy that company. This company is a great candidate for a hedge fund to purchase. Another example is SLT (Sterilite Industries), which has 76.98% of it's market cap in CASH. It is a copper company and should rebound when construction rebounds, but the purchase price for this $4.166 Billion company is discounted by $3.21 Billion because of the cash it has on hand; the total cost excluding premium is: $956 million. With 18.303% return on equity, this is a great deal. Since no potential purchasers can be identified on my list in this industry, this is another candidate for a buyout by a hedge fund.
An example of a company with 35.96% of it's market cap in cash is KG (King Pharmaceuticals). This company could be bought for less than it's current market cap of $2.514 Billion when cash is factored into the price, by any one of 3 pharmaceutical companies that each have in excess of $10 Billion in Cash (PFE, WYE, JNJ). Of course synergies of the companies need to be considered, but from a purely financial observation this makes sense.
The big acquisition for 2009 will be ADBE (Adobe). Adobe has lost 50% of it's value this year ($41.71 1/2/08 to $21.64 12/18/08). It has gotten very cheap and yet it has a product in use on almost 100% of computers around the world (Acrobat Reader). There are other reasons for the sale of (and potential bidding war for Adobe) in 2009 is that there are 4 potential buyers (AAPL, MSFT, ORCL, GOOG). An argument can be made for any one of the 4 being a better fit than the others. There is already a close board of director relationship between Oracle and Adobe. Adobe's former CEO (Bruce Chizen) sits on both Adobe's and Oracle's board of directors, and has been given the designation of "Strategic Advisor" (usually the title given to those individuals helping with M&A Activity). Oracle can certainly afford Adobe, and it does have a pattern of growth through acquisition, but is not as financially strong as Apple, Microsoft, or Google. Because Microsoft botched its attempt at acquiring
Yahoo, they may have something to prove by going after Adobe, but it is developing a competing product to Adobe's Dreamweaver known as Silverlight which when you pull up Microsoft's website seems to be the only product they are excited about selling now.
That leaves Apple and Google. Apple seems to be pre-occupied with Steve Jobs health and Google seems like it's backpedaling from any acquisitions as it has it's first taste of an economic downturn. In my opinion any one of these 4 could bid on Adobe, and there may be multiple bidders. Google would make the most for synergy; can you imagine if Google figures out how to attach advertising to every Adobe Acrobat reader program out there?
MSFT may also be interested in a game acquisition to increase it's XBOX game inventory (See: ATVI and ERTS). Since ATVI was acquired by Blizzard Entertainment, I'm not sure if this will happen. ERTS has a -13.113% Returnon Equity, so I'm not sure if this would make much sense either, but both companies are sitting on almost $3Billion in Cash each with NO DEBT. That certainly is appealing and ERTS has a current market cap of only $5.526 Billion and 44% of that is in CASH. Another thought might be that AAPL might use this as an opportunity to dip it's toes into the gaming market... perhaps in conjunction with a game system??? Could this be why they pulled out of MacWorld? What would the name be for an Apple game system? I like the name "macAttack".
There is another category where there are multiple BUY opportunities with only one qualified BUYER and that is in the semiconductor industry. INTC (Intel) has $12 Billion in Cash and there are 7 BUY opportunities (ADI, MXIM, NVDA, BRCM, WFR, UMC, MRVL). MXIM, WFR, and NVDA have the most cash as a percentage of market cap. I'd have to leave it up to Intel to
determine which company would provide the best synergy.
CSCO (Cisco) could certainly purchase JNPR (Juniper Networks). It has $27 Billion in Cash to Juniper's $9 Billion Market Cap and $2 Billion in Cash and no debt. Cisco also has a long history of growth through acquisition although Juniper Networks would be it's largest acquisition.
Lastly, there is the acquistion strategy of a merger of Equals. Although FLR (Fluor) is three times larger than FWLT (Foster Wheeler) based onMarket Cap, It is only 2 times larger based on Cash. FLR could buy FWLT, and is the most probable scenario, but there could also be a merger of equals for an exchange of stock between the two.
All of the companies on this list have strong cash positions, which will be critical in the coming months. 5 of the companies have negative return on equity which could affect the premium paid on their purchase price; certainly they are low on the list for potential acquisition. Although this list focuses primarily on the cash position of the company, obviously synergies and due diligence for any "gotchas" that the market isn't factoring into the stock price need to be considered.
My prediction is that there will be far fewer mergers and acquisitions in 2009 than in previous years, but the companies on this list will certainly be in the headlines.
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